Why Unconventional Gas Matters

While our politicians stimulate smart grid and renewable energy until we tingle, debate about global warming and dream up subsidies of every type to revolutionize the energy business for the future, a funny thing is happening in the energy industry right here at home. We are re-inventing the energy business the old fashioned way—-by just doing it!

Three things drive this renewal of America’s energy future:

Advanced technology including horizontal drilling and other E&P solutions to improve productive capacity, performance and overall potential of oil, gas and power resources right here at home.

Investment realities are driving major oil & gas firms and a score of smaller, faster, more nimble competitors to use technology to go after real opportunities instead of depending upon gigantic plays in distant places of questionable political reliability.

Untapped domestic opportunities are proving to be just as powerful a source of growth as chasing illusive foreign investment. In a world economy turned upside down doing business close to home, in stable markets, under the rule of law, where economics matter is proving attractive.

The result is the spectacular growth in unconventional gas in the US which is not only turning global markets and would-be energy monopolists upside down, but dramatically improving America’s energy security, energy reliability and our economy.

Don’t believe me?

The US Energy information Agency reports that over the last three years the United States has surpassed Russia as the global leader in producing natural gas.[1] This is driven entirely by the growth in production from shales using American developed horizontal drilling, hydraulic fracturing and other techniques to unlock oil and gas from previously uneconomic plays. All across America E&P companies are bring new supplies of natural gas and domestic oil to market.

More exploration and geological analysis suggests that the potential for unconventional gas is substantial—very substantial and wide spread. Only a few years ago growth in demand for natural gas was a big problem because that demand threatened to turn the US gas market from a domestic market into a global one creating the same dependence on imported liquefied natural gas to meet demand as we have for oil imports. This risk of energy imbalance represented one of America’s greatest strategic threats.

Today in a few short years, without major government intervention—except staying out of the way, our energy economy and energy future is dramatically different—for the better.

Now consider Europe by comparison.

Collaboration between Germany and Russia and acquiescence by the rest of the EU has quickly lead to a situation where Europe is increasingly dependent upon imported Russian natural gas to meet its winter heating and industrial requirements. So in 2006 when Russia shuts off gas to Ukraine in a pricing dispute after Ukraine objected to a 400% increase in prices, the impacts were felt across much of Europe and served as a wake up call.

Russia offered to buy virtually all the exportable gas from Libya, Europe’s only logical alternative to Russian gas and has opposed pipeline construction projects it does not control to serve EU markets.

EU has been working overtime to build renewable energy projects to reduce its energy dependence but it requires hundreds of projects and deep subsidies to make a significant difference in that dependence. In a recent story in the UK, Gazprom Chairman Alexander Medvedev said the UK should be more “pragmatic” saying it would be impossible to meet the UK’s greenhouse emission reduction targets of getting one-third of its electricity from renewables by 2020 without gas. Medvedev may be closer to right than most Europeans want to hear when he says it will be one-third the cost to meet emission reduction goals if the UK just replaces its dirty coal plants with new gas plants rather than wind energy.

So we have the perfect lab experiment at work and we can see what the empirical results will be. Already, the Europeans are hitting bumps in the road with the failure of their feed-in-tariff regimes in Spain and Germany causing substantial disruption of their solar PV markets. Wind production in the EU is moving ahead and the EU will be the global leader in offshore wind production if it achieves its targets. But will it be enough?

So what?

Expanding clean and renewable energy use to reduce greenhouse gas emissions is an important part of a responsible, sustainable energy future for every market. But a rapid transition from coal baseload is a daunting challenge and it has a very high cost. And important as environmental sustainability is to our energy future, it is not the only strategic interest that must be protected.

Equally important is energy security and the avoidance of energy extortion that has plagued customer relationships with Russia. It is not as if the EU does not know this is a problem, but it is very difficult to escape the embrace of the Russian bear once he squeezes you.

For the US, the growth in unconventional natural gas is a change in energy dynamics that is revolutionizing our energy outlook and dramatically improving our energy security and economics.

The biggest risks for unconventional gas are not technical or market risks—they are political risks that the Congress and Administration will slap new taxes on domestic energy production that have a chilling effect on capital investment. If the domestic energy markets are left to work based upon the competitive laws of supply and demand, America is coming back strong.